DEPARTMENT OF THE TREASURY Internal
Revenue Service 26 CFR Part 1

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations and removal of temporary regulations.

SUMMARY:

This document contains final regulations under section 1502 that provide
the Internal Revenue Service with the authority to designate a domestic member
of the consolidated group as a substitute agent to act as the sole agent for
the group where a foreign entity is the group’s common parent. The
final regulations are necessary to clarify and explain the rules governing
the designation of an agent for the members of a consolidated group. The
regulations affect corporations that join in the filing of a consolidated
Federal income tax return where the common parent of the consolidated group
is a foreign entity that is treated as a domestic corporation pursuant to
section 7874(b) of the Internal Revenue Code (Code) or as the result of a
section 953(d) election.

DATES:

Effective Date: These regulations are effective
July 23, 2007.

Applicability Date: For dates of applicability,
see §1.1502-77(h)(3).

FOR FURTHER INFORMATION CONTACT:

Stephen R. Cleary, (202) 622-7750, (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On March 14, 2006, the IRS and Treasury Department published temporary
regulations (T.D. 9255, 2006-1 C.B. 741) in the Federal
Register (71 FR 13001) providing the IRS the authority to designate
a domestic member of a consolidated group to be the sole agent for the group
where the common parent of the group is a foreign entity. A notice of proposed
rulemaking (REG-164247-05, 2006-1 C.B. 758) cross-referencing the temporary
regulations was published in the Federal Register for
the same day (71 FR 13062). The temporary regulations provide procedures
for the IRS’s designation of a “domestic substitute agent”
and define the term of that substitute agent’s agency.

Explanation of Provisions and Summary of Comments

No comments were received responding to the notice of proposed rulemaking,
and no public hearing was requested or held. The proposed regulations are
adopted as amended by this Treasury decision and the corresponding temporary
regulations are removed. The temporary regulations, as contained in the 26
CFR part 1 edition revised as of April 1, 2007, remain in effect for certain
taxable years as provided by §1.1502-77(h)(3)(ii) of these final regulations.

These final regulations clarify the term of the domestic substitute
agent’s agency by specifying that once appointed for one or more taxable
years of the group, unless the designation is expressly limited to such term,
the domestic substitute agent will continue to be the agent for subsequent
taxable years of the group until certain specified events occur. These final
regulations also specify that, if the domestic substitute agent is the group’s
agent for a taxable year, it will generally continue to serve as the agent
for that year until the domestic substitute agent’s existence terminates.
Finally, these final regulations clarify that if a group with a domestic
substitute agent continues in existence with a new common parent that is a
domestic corporation (without regard to section 7874 or a section 953(d) election)
during a consolidated return year, the domestic substitute agent is the agent
of the group for the year through the date of the transaction in which the
new common parent becomes the common parent, and thereafter the new common
parent becomes the agent of the group for the entire taxable year.

Additionally, these regulations indicate that §1.1502-77(e)(1)
is also applicable for purposes of determining whether a domestic substitute
agent’s existence has terminated.

Special Analyses

It has been determined that this Treasury decision is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. Pursuant to 5 U.S.C. 553(d)(3) it has been determined
that a delayed effective date is unnecessary because this rule finalizes currently
effective temporary rules regarding the designation of a domestic substitute
agent without substantive change. It is hereby certified that these regulations
will not have a significant economic impact on a substantial number of small
entities. This certification is based on the fact that these regulations
will primarily affect affiliated groups of corporations that have elected
to file consolidated returns, which tend to be larger businesses. Therefore,
a regulatory flexibility analysis is not required. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of proposed rulemaking preceding
these final regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small business.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing
the entry for §1.1502-77T to read as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1502-77 is amended by:

1. Revising paragraph (e)(1).

2. Adding paragraph (h)(3).

3. Revising paragraph (j).

The additions and revisions read as follows:

§1.1502-77 Agent for the group.

* * * * *

(e) Termination of a corporation’s existence—(1) In
general. For purposes of paragraphs (a)(1)(v), (a)(4)(i), (d),
and (j) of this section, the existence of a corporation is deemed to terminate
if—

(i) Its existence terminates under applicable law; or

(ii) Except as provided in paragraph (e)(3) of this section, it becomes,
for Federal tax purposes, either—

(A) an entity that is disregarded as an entity separate from its owner;
or

(B) an entity that is reclassified as a partnership. * * *

* * * * *

(h) * * *

(3) Designation of a domestic substitute agent—(i) In
general. The provisions of paragraphs (e)(1) and (j) of this section
apply to taxable years for which the consolidated Federal income tax return
is due (without extensions) after July 23, 2007.

(ii) Prior law. For taxable years for which the
consolidated Federal income tax return is due (without extensions) on or before
July 23, 2007, see §1.1502-77(e)(1) as contained in the 26 CFR part 1
edition revised as of April 1, 2007. For taxable years for which the consolidated
Federal income tax return is due (without extensions) after March 14, 2006,
and on or before July 23, 2007, see §1.1502-77T as contained in the 26
CFR part 1 edition revised as of April 1, 2007.

* * * * *

(j) Designation by Commissioner if common parent is treated
as a domestic corporation under section 7874 or section 953(d)—(1) In
general. If the common parent is an entity created or organized
under the law of a foreign country and is treated as a domestic corporation
by reason of section 7874 (or regulations under that section) or a section
953(d) election (a foreign common parent), the Commissioner may at any time,
with or without a request from any member of the group, designate another
member of the group to act as the agent for the group (a domestic substitute
agent) for any taxable year for which the consolidated Federal income tax
return is due (without extensions) after July 23, 2007, and the foreign common
parent would otherwise be the agent for the group. For each such year, the
domestic substitute agent will be the sole agent for the group even though
the foreign common parent remains in existence. The foreign common parent
ceases to be the agent for the group when the Commissioner’s designation
of a domestic substitute agent becomes effective. The Commissioner may designate
a domestic substitute agent for the term of a single taxable year, multiple
years, or on a continuing basis.

(2) Domestic substitute agent. The domestic substitute
agent, by designation or by succession, shall be a domestic corporation described
in paragraph (d)(1)(i)(A) of this section (determined without regard to section
7874, a section 953(d) election or section 1504(d)).

(3) Designation by the Commissioner. The Commissioner
will notify the domestic substitute agent in writing by mail or faxed transmission
of the designation. The domestic substitute agent’s designation is
effective on the earliest of the 14th day following
the date of a mailing, the 4th day following a
faxed transmission, or the date the Commissioner receives written confirmation
of the designation by a duly authorized officer of the domestic substitute
agent (within the meaning of section 6062). The domestic substitute agent
must give notice of its designation to the foreign common parent and each
corporation that was a member of the group during any part of any consolidated
return year for which the domestic substitute agent will be the agent. A
failure of the domestic substitute agent to notify the foreign common parent
or any member of the group does not invalidate the designation. The Commissioner
will send a copy of the notification to the foreign common parent, and if
applicable, to any domestic substitute agent the designation replaces; a failure
to send a copy of the notification does not invalidate the designation.

(4) Term of agency—(i) Taxable
years for which domestic substitute agent is the agent. If the
Commissioner designates a domestic substitute agent for one or more taxable
years, unless the designation is expressly limited to such term, such domestic
substitute agent will continue as the group’s sole agent for subsequent
taxable years until the domestic substitute agent ceases to be a member of
the continuing group, is replaced by a new domestic common parent (as provided
in paragraph (j)(4)(iv)(A) of this section), is replaced by the Commissioner,
or is replaced by a default substitute agent (as provided in paragraph (j)(5)(ii)
of this section). If during the course of a consolidated return year the
domestic substitute agent ceases to be a member of the continuing group or
is replaced, it shall no longer act as agent for such taxable year or subsequent
taxable years in any matter.

(ii) Continuing agency for prior taxable years.
Unless replaced by a default substitute agent (as provided in paragraph (j)(5)(ii)
of this section) or by the Commissioner, the domestic substitute agent at
the end of a taxable year of the group will remain the agent for such year
until its existence terminates, even if the group subsequently ceases to exist
or the domestic substitute agent subsequently ceases to be a member of the
group.

(iii) Replacement of a §1.1502-77(d)(1) agent.
If, pursuant to paragraph (d)(1) of this section, the common parent of the
group designates a foreign common parent as the agent for the group for any
taxable year, the Commissioner may, at any time, designate a domestic substitute
agent to replace the foreign common parent, even if the Commissioner approved
the terminating common parent’s designation.

(iv) Group continues with a new common parent—(A) Year
the new common parent becomes the common parent. If the group
has a domestic substitute agent and the group continues in existence with
a new common parent during a consolidated return year, and such new common
parent is a domestic corporation (determined without regard to section 7874
or a section 953(d) election), the domestic substitute agent at the beginning
of the year is the agent for the group through the date of the transaction
in which the new common parent becomes the common parent, and the new common
parent becomes the agent for the group beginning the day after the transaction,
at which time it becomes the agent for the group with respect to the entire
consolidated return year (including the period through the date of the transaction)
and the former domestic substitute agent will no longer be the agent for the
group for that year.

(B) Years preceding the year the new common parent becomes
the common parent. If after the Commissioner’s designation
of a domestic substitute agent the group remains in existence with a new common
parent, and such new common parent is a domestic corporation (determined without
regard to section 7874 or a section 953(d) election), the Commissioner may
designate the new common parent as the sole agent for the group for any of
the group’s prior taxable years (for which the consolidated Federal
income tax return is due (without extensions) after July 23, 2007) in which
the new common parent was a member of the group. For this purpose, the new
common parent is treated as having been a member of the group for any taxable
year it is primarily liable for the group’s income tax liability.

(v) Replacement of domestic substitute agent by the Commissioner.
The Commissioner may at any time, with or without a request from any member
of the group, designate a replacement for a domestic substitute agent (or
a successor to such agent).

(5) Deemed §1.1502-77(d) designation—(i) In
general. If the Commissioner designates a domestic substitute
agent under this paragraph (j), it will be treated as a designation of a substitute
agent under paragraph (d) of this section.

(ii) Default substitute agent. If the domestic
substitute agent’s existence terminates and it has a single successor
that is a domestic corporation (without regard to section 269B) that is eligible
to be a domestic substitute agent, such successor becomes the domestic substitute
agent and is treated as a default substitute agent under paragraph (d)(2)
of this section. See paragraph (d)(4) of this section regarding the consequences
of the successor’s failure to notify the Commissioner of its status
as a default substitute agent. The default substitute agent shall use procedures
in section 9 of Rev. Proc. 2002-43, 2002-2 C.B. 99, or a corresponding provision
of a successor revenue procedure for notification. (See §601.601(d)(2)(ii)(b)
of this chapter.)

(6) Request that IRS designate a domestic substitute agent—(i)
Original designation. If the common parent of the group
is a foreign common parent, and the IRS has not designated a domestic substitute
agent, one or more members of the group may request the IRS to make a designation
for taxable years for which the consolidated Federal income tax return is
due (without extensions) after July 23, 2007. Such request is deemed to be
a request under paragraph (d)(3)(i) of this section. Members of the group
shall use the procedures in section 10 of Rev. Proc. 2002-43, 2002-2 C.B.
99, or a corresponding provision of a successor revenue procedure for this
purpose. (See §601.601(d)(2)(ii)(b) of this chapter.)

(ii) Request that IRS replace a previously designated substitute
agent. If the IRS designates a domestic substitute agent pursuant
to this paragraph (j), one or more members of the group may request that the
IRS replace the designated domestic substitute agent with another member (or
successor to another member). Such a request is deemed to be a request pursuant
to paragraph (d)(3)(ii) of this section. Members of the group shall use the
procedures in section 11 of Rev. Proc. 2002-43, 2002-2 C.B. 99, or a corresponding
provision of a successor revenue procedure for this purpose. (See §601.601(d)(2)(ii)(b)
of this chapter.)

§1.1502-77T [Removed]

Par. 3. Section 1.1502-77T is removed.

Kevin M.Brown, Deputy
Commissioner for Services and Enforcement.

Approved July 16, 2007.

EricSolomon, Assistant
Secretary of the Treasury (Tax Policy).

Note

(Filed by the Office of the Federal Register on July 20, 2007, 8:45
a.m., and published in the issue of the Federal Register for July 23, 2007,
72 F.R. 40066)

Drafting Information

The principal author of these regulations is Stephen R. Cleary of the
Office of Associate Chief Counsel (Corporate). Other personnel from the Treasury
Department and the IRS participated in their development.